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    A factor-based approach to currency management

    A factor-based approach to currency management

    30 April 2020 Solutions
    Insight's approach to currency management

    At Insight, we believe that investment returns can be generated via awareness of a number of persistent behavioural features that occur within currency markets. By utilising a systematic approach to capturing these behavioural features, we believe that it is possible to achieve reliable and repeatable returns over time. This approach can be utilised within either absolute return strategies, which aim to generate returns above the risk-free rate, or to enhance the returns of hedging strategies.

    Our investment process can be broken down into three key features:

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    Identify appropriate currency pairs   Risk management and risk control   Tailored portfolio implementation
    From the liquid and diverse universe that makes up our currency opportunity set, we identify the most appropriate currency pairs that capture the behavioural factors we are targeting at a given point in time. These could be either return seeking, or have structural diversification benefits relative to other factors we are targeting.   From this pool of currency pairs, we create an appropriately risk-adjusted basket of currencies. We then scale exposures upwards or downwards, depending on the market environment to meet the aggregate portfolio risk target.   We tailor solutions for our clients in a way that satisfies their objectives and meets their performance and risk targets. We back this up by continuous monitoring and research to enhance our ability to capture behavioural factors.
       


    In this paper we explain:

    • how we define our opportunity set
    • the factors we use in our factor-based modelling
    • how we manage risk

     

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